An exit strategy for a startup is a business plan where the business entrepreneurs agree to sell their ownership in the company to investors or another company. Generally, it is a backup plan for a business owner or investor to sell off or otherwise dispose of a financial asset once the specified event or condition has occurred. Current statistics prove that more than 20% of small businesses fail in their first year of operation, and not only that but 50% of startups exit within their first five years of existence, according to the Bureau of Labor Statistics, 2021.
Consequently, an exit strategy can be a good business plan for entrepreneurs as they dilute their stakes in the business and gain a substantial profit in return.
Key Points to Understand About Startup Exits:
Types of exits
There are different types of exits, including mergers and acquisitions (M&A), initial public offerings (IPOs), and management buyouts (MBOs).
MBOs:
A management buyout (MBO) is when the existing management team of a startup company buys out the company’s ownership from its investors. It’s a way for the management team to take control of the company and gain more independence.
Exit timing
The timing of a startup exit depends on many factors, including the company’s growth, market conditions, and investor goals. Some startups may exit within a few years of founding, while others may take a decade or more to reach an exit.
Valuation
Startup valuation plays a crucial role in the exit process. The value of the startup company can be determined by various factors, such as its revenue, user base, intellectual property, and growth potential.
Impact on stakeholders
The exit process has different implications for different stakeholders. Founders and early employees may receive a substantial financial payout, while later employees may not benefit as much. Investors may see a return on their investment or a loss, depending on the exit value.
Best Exit Strategies for a Startup
Here are some of the best exit strategies for a startup you should consider as an entrepreneur;
Planned liquidation
Liquidation refers to the process of selling off a company’s assets, typically for the sole aim of generating a substantial amount of profit or cash at a discount. Liquidation may not be ideal for startups, but often, entrepreneurs and directors consider it a way to end a business.
Generally, many factors can lead to liquidation in business, including the inability of a business to pay off its debt. Another factor could be that the directors are finding it too difficult and stressful to cope with the business any longer. Also, liquidation may be an option when a business suffers from losses day in and day out to at least generate some cash out of it.
Friendly buyout
In a friendly buyout, the target company peacefully agrees to the acquisition offer without any argument or difficulty.
Acquisition
Acquisition is one of a startup’s most popular and smart exit strategies. It involves a business plan whereby a much bigger company acquires or takes over a smaller business.
In the past, several business acquisitions have occurred, including Vodafone acquiring Mannesmann for a mouth-watering $203 billion in November 2000. Google also took over DoubleClick with a whopping $90 billion. Other famous Acquisitions include:
- Facebook’s acquisition of WhatsApp and Instagram.
- Tesla Motors’ founder’s purchase of Twitter.
- Google’s acquisition of YouTube in the early 2000s.
Merger
This is when two or more companies come together to form a new entity. Merger reduces competition and increases market share. It also ensures the introduction of new products or services, improves operations, and, ultimately, drives more revenue as the companies pull their effort, time, ideas, and finances together to achieve a common goal.
There are three major types of mergers: horizontal mergers, which help increase market share; vertical mergers help explore existing strategies to ensure business growth; and concentric mergers help expand the product offering.
Initial Public Offering
An IPO, or Initial Public Offering, is the process by which a private company offers shares of its stock to the public for the first time. This allows the company to raise capital and provide liquidity to its early investors and employees. Here’s how an IPO typically works:
- The company works with investment banks to prepare a prospectus, which outlines the company’s financial history, management team, business model, and growth plans. The prospectus also sets the price range for the company’s shares.
- The investment banks work to market the IPO to institutional investors, such as mutual funds and hedge funds, as well as retail investors.
- The IPO is typically priced based on demand from investors. The final price is often higher than the initial price range set in the prospectus.
- The company’s shares begin trading on a public stock exchange, such as the New York Stock Exchange or NASDAQ, and the company becomes publicly traded.
IPOs have been a popular way for companies to raise capital since the 1980s. Here are a few examples of some of the biggest IPOs in history:
- Alibaba Group Holding Ltd. (2014) – The Chinese e-commerce giant raised $25 billion in its IPO, making it the largest IPO in history at the time.
- Facebook Inc. (2012) – The social media giant raised $16 billion in its IPO, making it the third-largest IPO in history at the time.
- Uber Technologies Inc. (2019) – The ride-hailing company raised $8.1 billion in its IPO, but its share price fell sharply in the weeks following the IPO.
While IPOs can be a way for companies to raise significant amounts of capital, they also involve significant costs and risks. Here are a few statistics about IPOs:
- In 2021, there were 1073 IPOs in the United States, which raised a total of $317 billion.
- The average IPO in 2021 raised $9 billion
- The median time from a company’s founding to its IPO is about 8 years.
Conclusion
Planning an exit strategy for your business is a good thing to do as an entrepreneur. However, it is essential to map out your exit strategy with the help of a professional before the actual exit occurs.